Philips Electronics Synchronizes Its Supply Chain
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Transcript of Philips Electronics Synchronizes Its Supply Chain
What’s covered?
• Bullwhip effect definition• Results of the bullwhip effect• Causes of the bullwhip effect• Preventive Actions• Case Study• Toyota’s logistic principles & Other
applications• Conclusion
Bullwhip Effect Definition
• The bullwhip effect is the uncertainty caused from distorted information flowing up and down the supply chain.
• It can be detected when orders sent to the manufacturer and supplier create a large variance than the sales to end customer.
Example
• Actual Demand from a Customer = 8 Units• To avoid the run out of floor stock, the retailer
will keep 2 units extra.The order given to Supplier = 10 Units
• To have a cost advantage and to have enough stocks for timely shipment of goods, the supplier will purchase in bulk.The order given to Manufacturer = 20 Units
• After getting the bulk orders, the manufacturer will ensure Economy of Scale in production to meet demand.No. of units manufactured = 40 Units
Example
Now 40 units have been produced for a demand of only 8 units
Actions to be taken:• The retailer will have to
increase demand by dropping prices or finding more customers by marketing and advertising.
Feast or Famine Diagram
At one point of time we have excessive inventories and at another point of time we have a stock out and thereby we are unable to meet the demand.
Demand ~ Supply Curve of a Product
Who is affected?
• Nearly all industries are affected!
• Firms that experience large variations in demand are at risk.
• Firms that depend on suppliers upstream or distributors and retailers downstream may be at risk.
Evolution
• The phenomenon was first found at Proctor & Gamble (P&G).
• This effect was named as the BULLWHIP EFFECT by the P&G executives as it resembled a Bull-Whip.
• The Bull Whip effect is also know as “Whip-Lash” or the “Whip-Saw” Effect.
Results of the bullwhip effect
• Excess inventories• Problems with quality• Increased raw material costs• Overtime expenses• Increased shipping costs
Results of the bullwhip effect - continued.
• Lost customer service• Lengthened lead time• Lost sales• Unnecessary adjusted capacity
Causes of the bullwhip effect
• Un-forecasted sales promotions• Sales incentives• Lack of customer confidence• Customers turning back sales
orders• Freight incentives
Solving the Bullwhip dilemma
• Improve communication along the supply chain. Retailers notifying firms upstream of
sales promotions will help clarify demand signals from consumers
Improved information will improve demand forecasts upstream in the supply chain.
Solving the Bullwhip dilemma - continued
• Improve sources of forecast dataFirms can use data from Point of Sale
computer systems to derive data from forecasting
Firms along the supply chain can use EDI systems to retrieve data on items that are legitimately being purchased by customers
Solving the Bullwhip dilemma - continued
• Work with firms upstream and downstream in the supply chain Create smaller order increments to
decrease time between orders. Order processing will become closer to real-time.
Work to develop consistent pricing of products to avoid demand fluctuations from the sale of inexpensive products.
The Project
• Project team (Philips Semiconductors (PS) and Philips Optical Storage)
• CQM consultants, • TUe operations research experts.
The Collaborative-Planning-Support Tool
The CP process comprises four stages:
• Stage 1. Gather data. • Stage 2. Decide. • Stage 3. Escalate.• Stage 4. Deploy.
Logistics principles proposed by Toyota to mitigate Bullwhip effect
1. Synchronisation : No overproduction or waiting time Quick response to changing
requirements
2. Takt : Each operation performs equally
Logistics principles proposed by Toyota to mitigate Bullwhip effect
3. Flow:Reduced lead timesCuts inventory lot sizeHigh variety flexibility
4. Pull:Decentralized material controlNo information distortion
Logistics principles proposed by Toyota to mitigate Bullwhip effect
5. Standardisation: Improved process qualityConsistency in cycle time
6. Integration:Reduced uncertainty of material flowQuick response due to undelayed and
undistorted data
Other Ways
Mitigating Bullwhip effect• Aligning of Goals and Incentives.• Improving Information visibility and accuracy.• Improving Operational performance.• Designing pricing strategies to stabilize orders.• Building strategic partnerships and trust.
2 Methods to reduce Bullwhip effect• Continuous replenishment and Vendor Managed
inventories• Collaborative Planning, Forecasting and Replenishment
Other Ways
Examples:Vendor Managed Inventory to reduce Bull
whip effect
• Kmart implemented Vendor managed inventory with 50 of its suppliers
Benefits: Inventory Turns on seasonal items increase from 3 to 10 and on non seasonal items from 12 to 20.
• Fred Meyers reduced inventories by 40%, and increase the fill rate by 98%
Other Ways
Other ways of mitigating Bullwhip effect
Collaborative Planning , Forecasting and Replenishment (CPFR) : has been implemented by more than 300 companies.
Specific Example:Henkel, German detergent
manufacturer, and Eroski, a Spanish food retailer
Benefit: Forecasting error reduced from 70% to less than 20%
Examples
Example : Hyper city Mall in India adopted CFPR practice.
Benefits: Decrease of 2% in stock levelsIncreased RevenueElimination of Expired stockReduction in write offs
Summary
Causes of the bullwhip effect may include:
• poor forecasting of sales• incorrect information • Sales incentives, sales promotions • lack of customer confidence.
Summary- Continued..
Results of the bullwhip effect can include:
• excess inventories• problems with quality• increased costs, overtime expenditures,
lost customer service, lost sales and more.
Summary - Continued
Solutions to the bullwhip effect include:
• improved information flow• stable pricing, small order • increments, focused demand on
EDI or POS systems and removal of sales incentives.
References• Cachon, G. P., Randall, T. and Schmidt, G. M., 2006. In Search of the
Bullwhip Effect. Working Paper, Wharton School of Business, University of Pennsylvania.
• Chatfield, D. C., Kim, J. G., Harrison, T. P. and Hayya, J. C., 2004. The Bullwhip Effect-Impact of Stochastic Lead Time, Information Quality, and Information Sharing: A Simulation Study, Production and Operations Management, 13(4), 340-353.
• Chen, F., Drezner, Z., Ryan, J. K. and Simchi-Levi, D., 2000. Quantifying the Bullwhip Effect in a Simple Supply Chain: The Impact of Forecasting, Lead Times, and Information, Management Science, 46(3), 436-443.
• Croson, R. and Donohue, K., 2003. Impact of Pos Data on Supply Chain Management: An Experimental Study, Production and Operations Management, 12(1), 1-11.
• Croson, R. and Donohue, K., 2006. Behavioral Causes of the Bullwhip Effect and the Observed Value of Inventory Information, Management Science, 52(3), 323-336.